South Africa: Proposed withdrawal of practice allowing deduction of interest expense against related interest income

Plans to withdraw Practice Note 31, which allows a deduction for interest expense against related interest income

Plans to withdraw Practice Note 31

The South African Revenue Service (SARS) announced that it plans to withdraw Practice Note 31, which allows a deduction for interest expense against related interest income, effective for tax years beginning on or after 1 March 2023.

SARS has invited comment on the proposed withdrawal by 15 December 2022. In addition, National Treasury is currently accepting proposals for legislative amendments until 30 November 2022. 


The deduction of interest requires that the income against which the deduction is sought is income derived from carrying on a trade. Case law has confirmed that the mere holding of investments does not constitute a trade. Thus, investment holding companies that merely hold shares in subsidiaries and act as a conduit for loan funding would ordinarily not be regarded as carrying on a trade. These companies (and other persons who act in a passive capacity and have no trade) would therefore not qualify for a deduction in respect of any interest incurred on loans advanced to them.

Notwithstanding that a taxpayer may not be carrying on a trade, Practice Note 31 (3 October 1994) allowed a deduction of “expenditure incurred in the production of the interest to the extent that it does not exceed such income.” SARS now intends to withdraw the Practice Note, citing abuse of the concession. 

KPMG observation

The proposed withdrawal of the long-standing Practice Note may have significant impact on taxpayers such as investment holding companies incurring interest expenses. Taxpayers may wish to review their investment holding structures to identify any entities that are reliant on Practice Note 31 and assess whether it is possible to restructure the funding.

Read a November 2022 report [PDF 226 KB] prepared by the KPMG member firm in South Africa


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